Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Measurements

Fair Value Measurements

4. Fair Value Measurements

Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant to a fair value measurement:

Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

Assets and liabilities subject to fair value measurements are as follows (in thousands):

	As of June 30, 2013
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds (1)	$	238,582	$	—	$	—	$	238,582
Federally-sponsored and corporate debt securities (2)	—		550,862		—		550,862
Available-for-sale equity investment	394		—		—		394
Total assets	$	238,976	$	550,862	$	—	$	789,838
Liabilities
Convertible notes maturing in 2016 (3)	$	364,700	$	—	$	—	$	364,700
Contingent consideration (4)	—		—		6,693		6,693
Total liabilities	$	364,700	$	—	$	6,693	$	371,393

	As of December 31, 2012
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds (1)	$	77,436	$	—	$	—	$	77,436
Federally-sponsored and corporate debt securities (2)	—		630,698		—		630,698
Available-for-sale equity investment	473		—		—		473
Total assets	$	77,909	$	630,698	$	—	$	708,607
Liabilities
Convertible notes maturing in 2016 (3)	$	—	$	316,250	$	—	$	316,250
Contingent consideration (4)	—		—		6,730		6,730
Total liabilities	$	—	$	316,250	$	6,730	$	322,980

(1) Included in “cash and cash equivalents”, “marketable investments” and “marketable investments and cash—restricted” on the accompanying consolidated balance sheets.

(2) Included in current and non-current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is principally measured or corroborated by trade data for identical securities or comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. See also Note 5—Investments—Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

(3) Included in convertible notes on the accompanying consolidated balance sheets. Refer to Note 9—Debt—Convertible Notes Due 2016 for details. As of December 31, 2012, the fair value of our 1.0 percent Convertible Senior Notes due September 15, 2016 (2016 Convertible Notes) was estimated using other observable inputs including the price of our common stock, implied volatility, interest rates and credit spreads, among others. More recently, a market has developed for our 2016 Convertible Notes, and we believe the level of trading activity pertaining to our 2016 Convertible Notes is now sufficiently active to become the principal basis for measuring their fair value. As a result, our 2016 Convertible Notes have been transferred from Level 2 to Level 1.

(4) Included in other liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability weighted discounted cash flow models (DCF). The DCFs incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to each acquisition agreement. We analyze and evaluate these fair value measurements quarterly to determine whether valuation inputs continue to be relevant and appropriate or whether current period developments warrant adjustments to valuation inputs and related measurements. Any increases or decreases in discount rates would have an inverse impact on the corresponding fair value, while increases or decreases in expected cash flows would result in corresponding increases or decreases in fair value. As of both June 30, 2013 and December 31, 2012, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 6.6 percent to 17.2 percent, respectively.

A reconciliation of the beginning and ending balance of Level 3 liabilities for the quarter and year-to-date is presented below (in thousands):

	Contingent Consideration
Balance April 1, 2013—Asset (Liability)	$	(6,660	)
Transfers into Level 3	—
Transfers out of Level 3	—
Total gains/(losses) realized/unrealized:
Included in earnings	—
Included in other comprehensive income	(33		)
Purchases	—
Sales	—
Issuances	—
Settlements	—
Balance June 30, 2013—Asset (Liability)	$	(6,693	)
Amount of total gains/(losses) for the three-month period ended June 30, 2013 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities	$	—

	Contingent Consideration
Balance January 1, 2013—Asset (Liability)	$	(6,730	)
Transfers into Level 3	—
Transfers out of Level 3	—
Total gains/(losses) realized/unrealized:
Included in earnings	—
Included in other comprehensive income	37
Purchases	—
Sales	—
Issuances	—
Settlements	—
Balance June 30, 2013—Asset (Liability)	$	(6,693	)
Amount of total gains/(losses) for the six-month period ended June 30, 2013 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities	$	—

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities. The fair values of our marketable investments and our 2016 Convertible Notes are reported above within the fair value hierarchy. The recorded value of our $70.0 million mortgage loan approximates its fair value as it bears a variable rate of interest that we believe approximates the market rate of interest for debt with similar credit risk profiles, terms and maturities. Refer to Note 9—Debt—Mortgage Financing for details.